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Jeff Saut to US Investors: Proceed With Caution

"I asked the obligatory question: How do you decide when to make
a trade?" "Through experience," he says, propping his foot up on a
small fold-out seat screwed to his post. "Over the course of
eighteen years as a specialist, I've had every type of experience -
up market and down market, people getting shot, wars, you name it -
and you learn how to react based on those experiences. I guess I've
had everything happen, and I guess you store it in the computer in
your head. You don't have a lot of time to decide, that's for sure.
And you have to anticipate. You have to look at the tape and
anticipate - two months or three months, maybe a day or so, maybe
two or three seconds before someone else. That's what makes you a
good trader... People talk a lot about their bellies. I guess that
has something to do with it, too. You do feel something in your
gut."

He clears his throat with a loud harrumph and goes on: "You watch
the tape. There's a talent to reading the tape. Later today, either
the market is going to go further down or it's going to rally. It's
down fourteen now, at eleven-thirty. You have to anticipate when
the rally will start and end. An outsider looks and sees the market
down six points for the day. A student of the market looks at what
the market was doing over the course of the day. Here, we live and
die by the moment. The market is constantly breathing during the
day. You have to breathe with it and sense its pulse. That
determines whether you're a successful trader or an unsuccessful
trader."

Do you ever hold on to a bad trade and hope for a rebound? I ask.
"Live in hope," Milton says ruefully, "and die in despair." He goes
on to say, "You try to stretch your profits and limit your losses.
The worst thing you can do in this business is try to protect a bad
trade. You do this and they carry you out of here. This reminds me
of the kid who (poops) in bed and gets it all over his legs trying
to kick it out of the crib. You see, a bad trade is like a diseased
piece of meat. You don't want it any more of it. Throw it away.
Bury it. Burn it, just get the damned thing away from your mouth.
When you're breaking in a new trader, the hardest thing to learn is
to admit that you're wrong. It's a hard pill to swallow. You have
to be man enough to admit to your peers that you are wrong and get
out. Then you're alive and playing the game the next day. A lot of
traders don't learn that and they fail."

Last week
, I asked myself the obligatory question: "Did I make a bad trading
decision by targeting mid-July through mid-August (with the date
specific of July 19) as the timing point for the first meaningful
decline of the year?" The reason for said question was that every
time the
S&P 500
(INDEXSP:.INX) sold off last week, buyers showed up to save the
day. And the operative word is "trading" because that potential
downside strategy was merely a short-term tactical call. Indeed, I
continue to believe the odds are high that we are into a new
secular bull market. Last week the media help raised my conviction
level to "There they go again," to quote a President from an era
gone by. To be sure, "There they go again" as the recent pullback
attempts have caused the media to trot out the usual "Bear Boo"
suspects. The reason why is a mystery to me, because these
broken-clock bears have been wrong for more than four years! Of
course, I too have been called a broken-clock bull. Now anyone is
entitled to be wrong -- Lord knows I have been wrong more than I
care to admit -- but as my father used to say, "If you think the
equity markets are going up, be bullish, and if you think the
markets are going down, be bearish."

Speaking of being wrong, I had thought that while this quarter's
corporate earnings reports were going to look pretty good, the
revenues reports would come up short. So far, that is just not the
case with 56.3% of reporting companies beating their revenue
estimates. Meanwhile, 65.2% have beaten their earnings estimates
for the best reporting season since 4Q10. As for the sectors doing
the best on the earnings front, technology (+71.3%), industrials
(+68.7%), and financials (+67.9%) have the best beat rates, while
utilities (+22.2%), telecom (+33.3%), and materials (+51.0%) have
done the worst. By my work, the only sectors
not
currently overbought, on a short/intermediate-term basis, are
materials, technology, and telecom.

This week, we'll get a barrage of economic reports having the
potential of a negative impact on the equity markets. Today we get
the pending home sales (-1.0e), and on Tuesday, we get the
S&P/Case-Shiller (+1.45) and the consumer confidence (81.0e)
reports. Wednesday ushers in the ADP Employment (180Ke), Q2 GDP
annualized (+1.0%e), the GDP Price Index (+1.1e), the Core PCE
(+1.0e), the Chicago PMI (54.0e), and the FOMC interest rate
decision. Thursday sees the release of the initial jobless claims
(+345Ke), the ISM Manufacturing (52.0e), the ISM Prices Paid
(54.0e), and the total vehicle sales (15.8Me), and then on Friday,
we'll get the all-important employment data.

As for the here and now, at the beginning of this missive, I asked
the obligatory question: "Did I make a bad trading decision by
targeting the mid-July through mid-August timeframe (with the date
specific of July 19) as the timing point for the first meaningful
decline of the year?" Given the weight of the evidence, I am
sticking with that "call." To recap a few of those "evidences"
mentioned over the past few weeks: We had a 7.5% decline in the SPX
between May 22 and June 24 that was accompanied by a much more
severe ~17% decline in the NYSE Advance/Decline Line; for the last
10 years between mid-July and early August, nine of the 10 S&P
macro sectors have declined; the SPX has been making new rally
highs without a similar expansion in new yearly highs for stocks
(at the May 21 high, there were 536 new 52-week new highs; last
Monday, there were 325); when they start "running" the laggards,
it's time to look over your shoulder; the 14-day Stochastic
Indicator has fallen below its moving average; and the list goes
on. So, the weight of the evidence continues to suggest caution
until the mid-July into mid-August point of vulnerability passes.

The call for this week:
On Friday, July 19 (D-Day), the SPX closed at 1692.09. The
following Monday, it closed at 1695.53 and then at 1692.39 on
Tuesday. Subsequently, the SPX has not been able to recapture those
highs. Anybody that follows
my work
knows that such D-Day "calls" have a tracking error of one to three
days. Also worth remembering is that I have always thought the SPX
could travel into the 1700 - 1730 level before any meaningful
decline begins. Whether that happens remains to be seen, but so
far, the SPX has been merely "hanging on," but I think its
"hanging" remains on borrowed time. Whatever the near-term
resolution, I know old traders, and I know bold traders, but I know
no old and bold traders! Be cautious, my friends.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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